July Prices Rose Almost 1%

Currently still traveling for work, but the news on PPI/wholesale prices was too important not to discuss (wrote this while stranded at the airport). July’s producer price index rose 0.9% month-ver-month, the fastest rate in three years. It’s clear that while businesses initially ate the increase in prices from tariffs, they plan to slowly increase prices for consumers over the coming months to restore margins.

In July 17th’s edition of the Brick Brief, I explained that producers would initially bear the brunt of tariffs and gradually hike prices for consumers incrementally, as buyers are sensitive to large and sudden price hikes. You can read a short excerpt from that edition’s Brick-by-Brick below. 

• Import tariffs are paid by U.S. importers, but costs work through the chain as follows:
Exporter → Importer → Domestic Producer → (PPI) → Wholesaler → Retailer → (CPI) → Consumer
• The Producer Price Index (PPI) measures prices received by domestic producers when selling to wholesalers and retailers, capturing price movement before it reaches consumers
• In June, core goods prices rose 0.3%, while services prices fell 0.1%, led by a 4.1% drop in hotel rates and 2.7% decline in airline fares; these declines offset goods inflation and left headline PPI flat month over month
• Mostly flat PPI suggests that U.S. producers and wholesalers have not broadly passed tariff-related costs downstream, with many still absorbing the impact through reduced margins
• While some goods categories are showing modest price increases, services' larger weight in the index means overall wholesale inflation remains muted despite rising trade costs
• Businesses tend to avoid sharp one-time price hikes and instead phase in cost increases over time; during the 2018 tariff round, prices on affected goods rose gradually over 6 to 9 months to avoid consumer pushback
• Fed officials including Bostic and Williams say the tariff impact is only beginning to show, and inflation could rise another 1% by early 2026, limiting room for rate cuts

July’s PPI data aligns with a report from Goldman’s chief economist that predicts that consumers’ share of tariff costs are expected to jump from 22% to 67% by year-end. 

Businesses are unwilling to absorb the full cost of tariffs and will pass some of that burden to consumers to protect their margins. I don’t understand why markets are pricing rate cuts as practically a certainty when Fed officials have signaled otherwise and there’s still significant uncertainty over whether tariffs will meaningfully raise consumer prices. That being said, tariffs are a one-time price shock, so they’re unlikely to drive sustained inflation unless they shift medium- or long-term business and consumer inflation expectations.

(Zillow sees mortgage rates at ~6.5% by the end of 2025. Based on their view, we can conclude that they don’t see rates going mcuh lower this year)

Normal newletter will return on Monday.

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